If it's not a rule, the APA doesn't apply

The issue of when an agency decision is a "rule" requiring APA-style rulemaking is frequently raised. The usual context is when an internal agency procedure - which the agency argues is not subject to rulemaking procedures - has an important impact on outside parties. An example from my own experience is the Federal Highway Administration's procedure for selecting trucking companies for inspection. Another example is provided by a recent Arizona Court of Appeals opinion concerning the amount health care providers are paid under workers' compensation. Canyon Ambulatory Surgery Center v. SCF Arizona, No. 1 CA-CV 09-0408, Sept 16, 2010 (Ariz. App.), http://www.cofad1.state.az.us/opinionfiles/CV/CV090408.pdf (most citations and footnotes omitted). Arizona's Administrative Procedure Act is similar to the Federal act on this issue.

¶1  Appellants ... (collectively the “Surgery Centers”) appeal the trial court’s dismissal of their claims against SCF Arizona1 (“SCF”) .... The Surgery Centers also challenge the court’s grant of partial summary judgment finding SCF exempt from the rulemaking requirements of the Administrative Procedures Act (“APA”)....

¶2  The Surgery Centers are two of approximately 150 ambulatory surgical centers (“ASCs”) in Arizona that provide facilities for various outpatient medical and  surgical procedures. SCF provides workers’ compensation coverage to Arizona employers, which indemnifies employers for financial obligations imposed by Arizona’s workers’ compensation laws. Between March 2003 and March 2007, the Surgery Centers treated 2100 workers who were entitled to benefits under SCF insurance policies  for work-related injuries (“injured workers”). The Surgery  Centers did not have a contract with SCF establishing billing rates for services provided to the injured workers, so they billed SCF [their standard rates].

¶3  Prior to March 2003, SCF paid the Surgery Centers the full amount billed. Thereafter, as part of its cost containment system, SCF hired Qmedtrix to review each bill submitted and recommend a reasonable reimbursement amount. Qmedtrix created a payment methodology based on reimbursements made by other carriers, which resulted in reduced payments to the Surgery Centers. As compensation for  Qmedtrix’s services, SCF paid Qmedtrix 25% of the recommended price reduction.

¶4  Canyon filed a declaratory judgment action in December 2003 alleging that SCF’s reimbursement methodology constituted a “rule” under the APA, and was adopted in violation of the APA’s notice and hearing requirements. ...

¶17  The Surgery Centers argue the trial court erred in granting summary judgment on their claim that SCF violated the APA rulemaking requirements. They contend that SCF, as a state agency, is subject to the provisions of the APA and that the Qmedtrix payment methodology is a de facto “rule” promulgated by SCF in violation of the APA’s notice and hearing requirements. ...

¶19  As the trial court noted, it is undisputed that SCF’s adoption of a new pricing methodology was not done in compliance with the APA. ...

¶21  Regardless of whether SCF is a state agency subject to the APA, we are not persuaded that the use of the Qmedtrix methodology is a rule subject to APA  notice and hearing provisions. A “rule” within the APA is defined as any agency statement that “implements, interprets or prescribes law or policy.” An entity’s internal guidelines, however, are not rules. ...  

¶23  ...[T]he fee methodology at issue here is not a rule subject to the APA; it is merely a way to collect data to be considered in setting reimbursement amounts, in the exercise of SCF’s discretion. Here, the record reflects that the information provided by Qmedtrix to SCF is intended as a “recommendation” of how much SCF should pay based on Qmedtrix’s estimation of what is a reasonable  charge. [Note 12]

[Note] 12  Moreover, after the court granted SCF partial summary judgment on this issue, the Surgery Centers conceded that calculations made by Qmedtrix are recommendations when they stipulated in the joint pretrial statement that "SCF has paid Canyon and El Dorado the amounts that were recommended by Qmedtrix."

SCF is under no obligation to adopt the recommendations of Qmedtrix; it simply uses the information provided to guide its reimbursement decisions. [Note 13]

[Note] 13  This conclusion is further supported by the fact that SCF, on at least one occasion, informed Qmedtrix of SCF’s disagreement with Qmedtrix’s reimbursement recommendations for particular medical services and Qmedtrix adjusted its reimbursement methodology accordingly. SCF’s decision to adopt the vast majority of Qmedtrix’s reimbursement recommendations during the time frame at issue does not change our analysis. 

¶24  In addition, applicable statutory authority provides that SCF does not adopt rules regarding workers’ compensation matters; those rules are promulgated by the Industrial Commission of Arizona (“ICA”).  A.R.S. § 23-107(A) (Supp. 2009) (granting the ICA “full power, jurisdiction, and authority to ..  .  [f]ormulate and adopt rules and regulations for effecting the purposes of this article” including acting “as the regulatory agency insuring that workers’ compensation carriers are processing claims in accordance with chapter 6 of this title”). The  “rulemaking authority” of the SCF is limited to two circumstances. The SCF Board of Directors may adopt rules “for the conduct of its business[.]” The SCF manager may also “adopt rules for the collection, maintenance and disbursement of the fund[.]” Neither of these rulemaking categories is subject to the APA requirements because both involve matters “concerning only the internal management of [SCF] that do[] not directly and substantially affect the procedural or substantive rights or duties of any segment of the public.” [Note 15]

[Note] 15 Furthermore, the rules adopted by the SCF Board of Directors under A.R.S. § 23-981.01(A) are not subject to the APA because the Board has discretion in publishing and distributing such rules.  § 23-981.01 (stating that the board “may cause them to be published and  distributed”). (emphasis added).  In contrast,  A.R.S. §§ 41-1003 (2004), -1012 (2004) of the APA provide that rules must be published. (Emphasis added.) ... 

¶25  The Surgery Centers cite three cases in support of their argument that prescribing reimbursement amounts for healthcare providers is tantamount to “rulemaking” under the APA. We find these cases inapposite. Each of them involved a state agency expressly empowered to promulgate rules governing the administration of those agencies, including prescribing fees and amending or repealing prior rules. Moreover, in each case, the agency in question intended to establish an exclusive and universally applied reimbursement scheme pursuant to its statutory authority.

¶26  In sum, we find the Qmedtrix methodology employed by SCF to inform its decisions regarding reasonable reimbursement amounts to health care providers is not a rule within the meaning of the APA. Consequently, the trial court did not err in granting SCF’s motion for partial summary judgment as to the non-applicability of the APA.

I submit that the Court's argument in ¶¶24 and 25 about the SCF's limited authority to make rules begs the question (and I mean that as a term of art). To say an agency policy is not a rule because the agency doesn't have the authority to make rules is solipsistic at best. However, the argument that the use of Qmedtrix is an internal, information gathering procedure rather than a "rule" is more cogent. Had the SCF used its own staff to make these recommendations rather than a contractor, would there be less whining? EMM